ITAD BIR Ruling No. 060-14

June 9, 2014 ITAD BIR RULING NO. 060-14 Article 10, Philippines-Japan tax treaty Manabat Sanagustin & Co., CPAs The KPMG Center, 9th Floor 6787 Ayala Avenue, Makati City Attention: Maria Georgina J. Soberano Gentlemen : This refers to your tax treaty relief application filed on November 12, 2013 requesting confirmation that dividends to be paid by Shi Manufacturing & Services (Philippines), Inc. ("Shi PH") to Sumitomo Heavy Industries, Ltd. ("Sumitomo") are subject to income tax in the Philippines at a rate of 10 percent based on the gross amount thereof pursuant to the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income , as amended by a Protocol 1 ("Philippines-Japan tax treaty") . It is represented that Sumitomo is a foreign corporation and is a resident of Japan based on the Certificate of Residence issued by the Shinagawa Tax Office dated September 11, 2013; that Sumitomo is situated at 1-1 Oosaki 2-chome, Shinagawa-ku, Tokyo, Japan; that Sumitomo is not registered as corporation or as partnership in the Philippines based on the Certifications of Non-Registration of Company issued by the Securities and Exchange Commission dated October 7, 2013; and that, on the other hand, Shi PH is a domestic corporation situated at the Lot 9 Phase 1, First Philippine Industrial Park, Sta. Anastacia, Sto. Tomas, Batangas. It is further represented that on September 13, 2013, Shi PH declared cash dividends of 200,000,000.00 (conversion rate to Peso at 0.4403) in favor of its stockholders payable on December 18, 2013; that Sumitomo owns 1,540,000 shares of stock in Shi PH , equivalent to 99% of the total outstanding capital stocks of Shi-PH , through original subscription in December 2000, based on the Certificate issued by the Corporate Secretary of Shi PH on September 18, 2013; and that Shi PH paid the said dividends to Sumitomo on December 18, 2013 based on the Bank Certification issued by Mizuho Bank, Ltd. on December 18, 2013. It is finally represented, based on a Certification issued by the same Corporate Secretary of Shi PH dated September 18, 2013, that the dividends subject of the application for tax treaty relief is not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that a foreign corporation like Sumitomo , whether or not engaged in trade or business in the Philippines, are subject to income tax in the Philippines only with respect to income derived in the Philippines. Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, provides: aSTECI "Section 28. Rates of Income Tax on Foreign Corporations . (B) Tax on Nonresident Foreign Corporation . (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "Section 32. Gross Income . (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" With respect to a tax treaty, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1 and 2, Article 10 thereof provide: "Article 10 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 per cent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends; cHAIES b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 10 percent of the gross amount of dividends if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends during the period of six months immediately preceding the date of payment of the dividends; (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, considering that Sumitomo holds directly at least 10 percent (in fact, 99%) of the total shares of stock of Shi PH during the period of six months immediately preceding the date of payment of the dividends, (in this case since December 13, 2000), such dividends paid by Shi PH to Sumitomo are subject to income tax at the reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. DICSaH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Signed on February 13, 1980, and effective January 1, 1981.